Bank generosity allows purchasers to borrow more

How quickly things can change in the world of finance. One minute the banks are reeling from the global financial crisis and tightening the purse strings in fear, the next they’re throwing money at would be home buyers in a bid to win business.

Loan to value ratios were slashed post-GFC due to concerns that mortgage defaults could increase and cause lenders to lose their shirts, as occurred with some of the major players in the US.

But recent data from RateCity reveals that the number of mortgages with an LVR of 97 per cent doubled from 2.5 per cent in January to 5 per cent in June. In other words, it seems funds for property are once again becoming easier to obtain.

In a Sydney Morning Herald article RateCity chief Damian Smith said, “We haven’t seen this level of money offered to mortgage borrowers since the start of 2009.”

“Lenders are trying to kick-start growth in the mortgage market, and more generous LVRs and lending criteria are the key tool they use.”

With competition firing up in the lending arena, banks are increasing their LVR’s in a bid to win new business and entice borrowers over from other lenders. The ANZ increased their LVR from 90 to 95 per cent over the past six months on most of their mortgage products and the Commonwealth offers a generous 97 per cent on most of their home loans.

This about face from the banks is largely due to the fact that borrowing has slowed since the beginning of 2011, with home loans decreasing for a third consecutive time in March, by 1.5 per cent. This has seen the monthly volume of loans drop to ten year lows as increasing interest rates, affordability issues and softer property markets causes a decline in purchasing activity and in turn, demand for housing finance.

Of course this rings alarm bells for the banks that rely heavily on home lending when it comes to keeping shareholders happy with a healthy bottom line; bank stocks declined by 7 per cent over May.

Not only are the banks dipping their hands deeper into their pockets in an attempt to entice buyers (read borrowers) back into the market, they’re also weighing in on the affordability debate, which they see as a major factor in the recent slow down in home buying activity.

Both ANZ and Westpac are calling for reforms to make housing more accessible, with the latter recently suggesting that a forum on social and affordable housing was needed.

And perhaps they have a point, as more people take up the offer of higher LVR’s to get their foot in the proverbial property door.

“High LVR home loans need to be considered very carefully and while it’s better value to save for a bigger deposit, if you do choose a high LVR home loan, make sure you accelerate your repayments and look at refinancing in a year or two when your equity has grown,” said Mr Smith.

At the curent stage of our cycle, where property prices are flat and falling in some regions, it’s importnant to remember that high gearing is a double edged sword. When prices rise, high levels of gearing pay off handsomely, but if property prices fall 5% you may lose all your equity.

The key is to get good professional advice. If you’d like to know how much you can borrow, why not ask Rolf Schaefer of Metropole Finance – click here to find out more

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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